Definition of "Financial accounting standards board (fasb) 113"
New rule entitled "Accounting and Reporting for Reinsurance of Short-duration and Long-duration Contracts," which requires the insurance company to report all assets and liabilities relating to reinsurance contracts on its financial statements on a gross basis rather than on the net of the influence of reinsurance, as had been the historical reporting method. This rule establishes parameters for the determination of whether or not a specific risk has actually been transferred under a reinsurance contract. In order to be classified as a reinsurance contract that is, one of a risk-transferring nature the rule requires a reasonable possibility that the re-insurer may assume significant loss for accepting the insurance risk. Thus, a contract will be considered reinsurance only if it transfers significant insurance risk to the re-insurer, and if it is reasonably possible the re-insurer will suffer a significant loss under the reinsurance contract. Obligations owed to re-insurers under multi-year contracts must be reported as liabilities by the CEDING COMPANY and, at the same time, the re-insurer must report these obligations as assets on the balance sheet. However, if the ceding company incurs a profit under the multi-year contract resulting from good loss experience, the profit is shown as an asset on its balance sheet and the re-insurer shows this amount as a liability on its balance sheet. Thus, this rule established new generally accepted accounting principles for REINSURANCE to include the following: (1) reinsurance is defined for accounting purposes to exclude transactions that do not subject the RE-INSURER to the reasonable possibility of a substantial loss from the insurance risk assumed or does not transfer the underwriting risk; (2) retroactive and prospective provisions within the same reinsurance contract must be separately accounted if the separate accounting is not possible, the total reinsurance contract must be accounted for on a retroactive basis; (3) reinsurance recoverables must be reported as an asset on the balance sheet and the total re-insured claim liability to include the INCURRED BUT NOT REPORTED LOSSES (IBNR) reserves and recoverables on outstanding claims must be reported; (4) the CEDING COMPANY must defer gains on retroactive contracts and amortize these gains over the expected period of time necessary to settle the claims; and (5) insurer must disclose concentrations of credit risk resulting from reinsurance recoverables, and receivables.
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